Exam 22: Accounting Changes and Error Analysis

Use the following information for questions 44 and 45. Dream Home Inc., a real estate developing company, was accounting for its long-term contracts using the completed contract method prior to 2015. In 2015, it changed to the percentage-of-completion method. The company decided to use the same for income tax purposes. The tax rate enacted is 40%. Income before taxes under both the methods for the past three years appears below. -What amount will be debited to Construction in Process account, to record the change at beginning of 2015?

Vance Company reported net incomes for a three-year period as follows:2013, $191,000; 2014, $199,000; 2015, $180,000.In reviewing the accounts in 2016 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities: Instructions (a) Determine corrected net incomes for 2013, 2014, and 2015. (b) Give the entry to bring the books of the company up to date in 2016, assuming that the books have been closed for 2015.

Companies report changes in accounting estimates retrospectively.

Is the following exception applicable to IFRS or U.S. GAAP?"If determining the effect of a change in accounting principle is considered impracticable, then a company should report the effect of the change in the period in which it believes it practicable to do so."

A company changes from percentage-of-completion to completed-contract method, which is used for tax purposes. The entry to record this change should include a

On December 31, 2015, Grantham, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $2,500,000 increase in the beginning inventory at January 1, 2015. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is

Detailed guidance regarding the accounting and reporting for the indirect effects of changes in accounting principle is available under

When a company changes an accounting principle, it should report the change by reporting the cumulative effect of the change in the current year's income statement.

Adoption of a new principle in recognition of events that have occurred for the first time or that were previously immaterial is treated as an accounting change.

Use the following information for questions 64 and 65. Link Co. purchased machinery that cost $1,800,000 on January 4, 2013. The entire cost was recorded as an expense. The machinery has a nine-year life and a $120,000 residual value. The error was discovered on December 20, 2015. Ignore income tax considerations. -Before the correction was made, and before the books were closed on December 31, 2015, retained earnings was understated by

Which of the following is not accounted for a change in accounting principle?

The estimated life of a building that has been depreciated for 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should

During 2014, a textbook written by Mercer Co. personnel was sold to Roark Publishing, Inc., for royalties of 10% on sales. Royalties are receivable semiannually on March 31, for sales in July through December of the prior year, and on September 30, for sales in January through June of the same year. $\bullet$ Royalty income of $162,000 was accrued at 12/31/14 for the period July-December 2014. $\bullet$ Royalty income of $180,000 was received on 3/31/15, and $234,000 on 9/30/15. $\bullet$ Mercer learned from Roark that sales subject to royalty were estimated at $3,240,000 for the last half of 2015.In its income statement for 2015, Mercer should report royalty income at

Companies account for a change in depreciation methods as a change in accounting principle.

Joseph Co. began operations on January 1, 2014. Financial statements for 2014 and 2015 contained the following errors: In addition, on December 26, 2015 fully depreciated equipment was sold for $48,000, but the sale was not recorded until 2016. No corrections have been made for any of the errors. InstructionsIgnoring income taxes, show your calculation of the total effect of the errors on 2015 net income.

Presenting consolidated financial statements this year when statements of individual companies were presented last year is

Lanier Company began operations on January 1, 2014, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed: Based upon the above information, a change to the LIFO method in 2015 would result in net income for 2015 of

Use the following information for questions 47 and 48. On January 1, 2012, Nobel Corporation acquired machinery at a cost of $1,200,000. Nobel adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At the beginning of 2015, a decision was made to change to the double-declining balance method of depreciation for this machine. -Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, is

IFRS requires that changes in estimate be accounted for using the retrospective method.